On 27 December 2006, the Finance Bill for 2007 was finally approved and converted into Law No. 296 of 27 December 2006 (the Law). The Law was published in the Official Gazette No. 299 dated 27 December 2006. The main topics on corporate taxation are summarized below. Generally, the Law is effective from 1 January 2007.

Corporate income tax - IRES

(a) Non-operating company. After the amendments already introduced in July 2006 as part of Law Decree 223 of 4 July 2006. Further changes are provided by the Law to the non-operating company discipline. In particular, the minimun turnover threshold used to determine whether the company is an "operating" company or a "non-operating company", has been modified with regard to:

-		the 2% of the value of the participations must also include any financial instrument assimilated to a participation (other than shares and quotas) and (ii) corporate bonds or any other financial instruments. Previously, reference was made only to shares and quotas; and
-		the 6% of the values of real estate and ships: a derogation is introduced with regard to commercial buildings (namely A/10 category), in which case the rate is reduced to 5%; with regard to residential properties, 4%.

With regard to the percentage used to calculate the deemed taxable income, the 4.75% rate applicable to real estates and ships is now reduced to 3% for residential property acquired in the relevant taxable period and in the two preceding periods.

The Law also introduces an additional situation in which the non-operating taxation regime does not apply: to companies whose shares are (partly) listed on a regulated market (e.g. stock exchange), to their parent companies and to their subsidiaries. Further, the Law abolishes the option for companies to prove that they are an "operating" company irrespective of whether the minimum turnover thresholds are met. Indeed, the relief from the application of the non-operating rules may be achieved only trough an advanced ruling.

The above provisions are applicable starting from 4 July 2006.

The Law has also implemented special rules that apply to companies, which were a non-operating company at 4 July 2006 and which were transformed into a partnership or were wound up. In particular:

-		on income derived during the liquidation period or, in case of transformation, on the difference between the fair market value and the fiscal value of the assets owned at the date in which the transformation occurs, a 25% substitute tax is levied. The same substitute tax is levied on the "free tax reserves". Carry forward of losses is not permitted;
-		10% substitute tax is levied on any revaluation made according to special revaluation law;
-		in the case of liquidation, the income taxed in the hands of the shareholder shall be decreased by the amount subjected to the above said substitute taxes; and
-		on any assignment of asset made to a shareholder, a 1% registration tax is due. Such an assignment is never considered as a transfer falling within the scope of VAT. In case of assignment of real estate, the mortgage and cadastral taxes are levied at fixed amount of EUR 168.

(b) Merger, division and contribution of a going concern. The Law introduces a special provision with regard to the goodwill (even when imputed to real estate or movable properties) arising from a merger, a division or a contribution of going concern carried out during the year 2007 and 2008. Such goodwill is tax deductible, if the following conditions are met:

-		the extraordinary transactions have as a result the constitution of an Italian resident company; namely, a joint-stock company - società per azioni (S.p.A.), a partnership limited by shares - società in accomandita per azioni (S.a.p.a.), and a limited liability company - società a responsibilità limitata (S.r.l.);
-		the companies involved must have carried out business activity for at least the two years preceding the extraordinary transaction;
-		the companies involved cannot belong to the same group (e.g. have participation relationship or being directly or indirectly controlled by the same shareholder);
-		an advance ruling must be submitted to the tax authority; and
-		the companies incorporated cannot carry out extraordinary transaction in the subsequent four years; otherwise, the benefit is lost.

In any case, the maximum amount of the deductible goodwill is EUR 5 million.

(c) Long term-contracts. The amendments proposed in the Budget for 2007 have been confirmed.

(d) Tax credits. The tax credits rules proposed in the Budget for 2007 have been confirmed. However, the Law specifies that tax credit mechanism is subject to the authorization by the European Commission.

(e) Reserves. The amendments proposed in the Budget for 2007 have been confirmed.

(f) Carry-forward of losses. The amendments proposed in the Budget for 2007 have been confirmed.

Regional tax on productive activities - IRAP

(a) Reduction of the taxable base. The Law confirmed the contents of the draft Budget for 2007. However, it has been specified that the EUR 5,000 (or EUR 10,000 in case the company is located in particular areas in the south of Italy) deduction for each new employee with a contract with indefinite maturity is not allowed to banks, insurance companies and companies active in certain industries (such as transportation and utilities).

(b) Non-operating company. The Law introduces the applicability of IRAP, at the ordinary rate, to the non-operating company. The deemed taxable base is equal to the minimum presumed income calculated for IRES purpose, increased by employment costs and interest expenses. Previously, only corporate income tax (i.e. IRES at 33%) was due. The IRAP rules enter into force from 1 January 2007.

Italy complies with EU Commission's request to implement the Interest and Royalties Directive correctly

In line with the European Commission's formal request to implement the Interest and Royalties Directive (Council Directive 2003/49/EC of June 2003) (the Directive) correctly, on 7 February 2007 the Italian Government amended the Legislative Decree No. 143/2005, which implemented the Directive.

In particular, the wording "interest and royalty payments accrued on or after 1 January 2004" has been changed into "interest and royalty payments having become payable on or after 1 January 2004". The Government also provides that withholding tax unduly levied shall be reimbursed by the Italian paying agent to the non-resident in cash; the paying agent will reclaim the withholding tax from the Italian tax authorities through the "compensation system" (i.e. they will compensate any tax debits with the withholding tax credit).